Microsoft’s $20bn Acquisition of Nuance

By Chen Xiangyu (Owen), University College London 

DEAL OVERVIEW


Acquirer: Microsoft

Target: Nuance Communications

Total Transaction Size: $19.7B

Expected Closed date: Q3 2021

Acquirer advisor: Goldman Sachs

Target advisor: Evercore

Nuance Communications, a speech recognition and artificial intelligence software company, agreed to be acquired by Microsoft for $56 per share in an all-cash purchase worth $19.7 billion, that including the company’s debt. In order to grow market share in the healthcare industry, Microsoft will have access to Nuance’s partnerships. Nuance’s unique technology will be used in the cloud service, resulting in a faster entry into the market. This is Microsoft’s second-largest acquisition, behind the $24 billion purchase of LinkedIn in 2016. Microsoft has developed the Microsoft Cloud for Healthcare and is looking to incorporate it into Nuance’s product and service offerings. Mark Benjamin, Nuance’s current CEO, will continue in his position and report to Microsoft’s Cloud & AI lead.

“The path forward is clearly with Microsoft -who brings intelligent cloud-based services at scale and who shares our passion dor the ways technology can make a difference”

-Mark Benjamin, CEO of Nuance Communications

Acquiring company: microsoft


Microsoft is a worldwide technology company that produces, manufactures, licenses and maintains computer services including software and customer appliances. Microsoft employs approximately 150,000 employees globally and is one of the most valuable corporations in the world. It is known for its software product, Microsoft Windows, and its Xbox gaming console.

Credits: Microsoft

Founded in 1975, headquartered in Redmond, WA (USA)

CEO: Satya Nadella

Number of employees: 163,000

Market Cap: $1.97T (as of 04/9/2021)

EV: $1.92T

EBITDA: $74B

EV/Revenue: 12.51x

EV/EBITDA: 25.75x

LTM Revenue: $153B

TARGET COMPANY: Nuance communications


Nuance is a worldwide technology company that initiated speech recognition and was a major driving factor next to Apple’s Siri feature. Nevertheless, Nuance’s major business is in healthcare conversational AI, which is employed by 85 percent of Fortune 100 firms globally and acknowledged by more than 75 percent of US medical centers. 

Founded in 1992, headquartered in Burlington, MA (USA)

CEO: Mark D. Benjamin

Number of employees: 7,100

Market Cap: $15.23B (as of 04/9/2021)

EV: $16.5B

EBITDA: $254M

EV/Revenue: 11.74x

EV/EBITDA: 64.99x

LTM Revenue: $1.4B

Projections and assumptions

 
Short-term upsides 

Microsoft would be able to take advantage of Nuance’s experience and partnerships with EHR system suppliers to flow line its cloud service and boost healthcare clients using cloud services. Additionally, the transaction will enable Microsoft to increase two times its total addressable market (TAM) in the healthcare industry to roughly $500 billion by directing Nuance’s 10,000 current customers to Microsoft, with some of the world’s largest healthcare companies.

In the short term, the news of Microsoft’s second-largest acquisition in its company’s history is expected to have a significant influence on both Microsoft and Nuance. Despite the fact that Microsoft decided to pay a 23 percent premium to Nuance Communication, Inc.’s closing price of $56 a share, investors reacted positively to the acquisition. After the release of the agreement, Nuance’s stock price increased by $8.18, or over 18 percent. Microsoft’s acquisition is financial logically in the near run, although given the high price.

Long-term upsides

In the latest study, innovation was identified as a priority challenge for the industry, with worldwide health expenditure predicted to continue at 10.3 percent of world GDP. Through welfare services and applications, healthcare is expanding across the medical centers to become an everyday activity. Microsoft is a significant instrument for its clients’ invention into initiatives.

The deal paves the way for the company to become the go-to cloud supplier for healthcare companies. It will seek to carry on with enhancing the quality provided to patients as a result of acquiring Nuance’s expertise. Microsoft is adopting a strategic approach to lead this industry, as it has pioneered in many other areas. 

RISKS AND UNCERTAINTIES

The primary challenges to this merger are the antitrust probes that Microsoft has faced in the past years. Hence, regulators may be opposed to the merger to be proceeded. 

In addition, a concern might be the speed with which it might close and macro developments that could undermine the fundamental business model as well as the deal’s synergies, according to various analysts. The acquisition is likely to finalise in 2021, but more delay might undermine faith in the deal, which will raise concerns among stockholders, resulting in a drop in Nuance’s stock value, which was purchased at a 23 percent premium.

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